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Real Estate Quarterly
A Quarterly Newsletter for Real Estate Professionals
April – June 2023
Managing the Risks of Post Closing Possession Agreements
Since the onset of the pandemic, we have seen new strategies used to make purchase offers more attractive to potential sellers. Buyers have waived their right to a home inspection, agreed to cover any gap between purchase price and appraisal, and found creative ways to offer cash in lieu of obtaining financing. We have seen escalation clauses drive up the final purchase price. We have even heard of buyers offering cruises or other kinds of incentives to make their offers unique and stand apart from the rest.
Another negotiating tool that buyers have used to sweeten the deal is a flexible post-closing possession agreement. Housing inventory is still low. Market conditions are challenging and a seller’s fear of having no place to live after closing is real. That fear can keep the homes of would-be sellers off of the market, contributing to already low inventory numbers. Post-closing possession agreements have helped bring a level of comfort to sellers who are anxious about where they will live post-closing by allowing the seller to remain at the property for a fixed period of time. Among other things, these agreements impose an occupancy termination date by which the seller must vacate the property, and establish an escrow/security deposit account and a per diem/occupancy fee payable by the seller to the buyer.
We had clients who listed their home and received several offers. Most were cash. All waived their right to a home inspection and nearly all used escalation clauses. The sellers ended up taking one of the cash offers because it included a very flexible and very “seller-friendly” post-closing possession agreement. The agreement terms allowed the sellers to remain in the property for 3 months after closing without a per diem occupancy fee and without an escrow/security deposit. This was a fantastic incentive for the sellers, who had been unable to find their next home, and was the determining factor in having the buyers’ contract accepted. While the strategy played to the buyers’ advantage, allowing a seller to remain at a property post-closing without requiring a per diem occupancy fee and/or an escrow deposit was incredibly risky.
Buyers who allow post-closing possession, get two inspection opportunities commonly referred to as “walkthroughs.” One walkthrough is just prior to closing and the second takes place post-closing after the seller has vacated the property. The property should be handed over to the buyer on the agreed upon date in substantially the same condition as existed on the date of closing, allowing for reasonable wear and tear.
Problems can creep up when sellers default on their obligations under the post-closing possession agreement. Standard agreement terms incentivize sellers to vacate on the agreed upon termination date by increasing the per diem occupancy fee by 200%. If there’s no per diem to be paid the incentive to move out on time and avoid the penalty evaporates. Sellers may remain in a property well beyond the agreed upon termination date and buyers may find themselves without a place to live if they cannot extend their current housing arrangements. Worst yet, buyers may find themselves having to seek a legal remedy to have the sellers forcibly removed from the property.
A similar situation can arise with regard to repairs for damages caused by the seller during post-closing occupancy. Escrow accounts are used to encourage compliance with the contract and give the parties leverage in the event of a breach. For example, buyers can use escrow deposit funds to pay for repairs resulting from damages caused by the sellers. The incentive to have the funds returned at contract termination can incentivize the sellers to keep the property in good condition. Without the escrow, the sellers’ incentive disappears, and the buyers may find themselves in a lawsuit to recover their out-of-pocket expenses.
Possession agreements were certainly used prior to the pandemic, but their use has increased in recent years. They can be a real lifesaver for sellers and buyers, but need to be executed with care. The housing market has forced agents to become more creative when working with buyers, but our obligation to protect our clients remains the same. Managing the risks of post-closing possession agreements is something we discuss with our clients. While the agreement may be executed in good faith, unforeseen circumstances can lead to a breach. Be sure that you understand the risks and the legal remedies that are available when negotiating tools used to sweeten the deal turn sour.
– Jacqueline A. Carosa, Esq.